Leap, MetroPCS: Goldman Downgrades As Competition Heats Up; Both Stocks Fall

Goldman Sachs analyst Jason Armstrong this morning cut his ratings on both Leap Wireless (LEAP) and MetroPCS (PCS) to Neutral from Buy. He cut his price target on LEAP to $16, from $26; for PCS he goes to $7, from $14.

Armstrong writes that catalysts for the stocks remain negative, as competition in the pre-paid cellular market continues to intensify. He says upcoming quarterly reports are likely to disappoint.

Armstrong notes that Sprint’s (S) Boost Mobile pre-paid unit is having a “very strong quarter,” while the Tracfone unit of American Movil (AMX) has rolled out nationwide service through Wal-Mart (WMT). He adds that there are reports that T-Mobile is about to launch some new low-cost plans, with a $40 monthly rate for unlimited voice, or $50 for unlimited voice and text, and $60 for unlimited voice, text and data.

He notes that PCS has responded to the competition with a new $30 plan with unlimited talk and text in some markets.

Armstrong’s report include a discussion of where his old Buy ratings on the two stocks went wrong. “Although we still believe that these companies have low-cost leadership in the low-end localized segment of the wireless market, we underestimated the willingness to tolerate low margins shown by other market

participants,” he writes.

He adds that while a combination of the two companies makes sense, he doesn’t see the possibility as enough of an offset to invest in  the stocks. “Our view is that a deal requires one company to be driven into the arms of the other, either from an operational mis-step from one, or a liquidity scenario,” he writes. “However, neither has a funding gap currently, and each have arguably faced the same recent operational

challenges.”

This morning, LEAP is down 50 cents, or 3.6%, to $13.52; PCS is down 35 cents, or 5%, to $6.65.